HELPING YOUR CHILD choose a college that’s a good fit—and that you and your teenager can afford—can be a confusing process. The right fit can be a life- and paycheck-enhancing experience. The wrong fit can be a waste of time and money.
In the past two years, my wife and I have helped our son and daughter pick colleges. Along the way, we’ve learned four lessons I wish we’d known at the start of the process.
Lesson 1: The net price calculator is your friend.
Every college that participates in federal financial-aid programs is required to provide a net price calculator on its website. The calculator allows you to enter details about your finances and receive an estimate of how much your family will have to pay. That estimate will include details about the expected amount of loans you’ll receive—and which your child or you will need to repay—as well as any grant or scholarship aid, which doesn’t need to be paid back.
To complete the calculator’s inputs accurately, you’ll likely need a copy of your most recent federal tax return, plus your bank and investment account statements. The estimates I got from the calculator closely matched what the colleges offered. Be aware that some colleges may offer generous grants the first year and then require high loans in later years.
The calculator is a great way to find out whether you’ll be able to afford a college and how net expenses compare across colleges. Please don’t make the mistake of letting your child get excited about a college, apply to it and get accepted—only to discover you can’t afford it.
Lesson 2: Some assets and debts affect financial aid—and some don’t.
Retirement assets like 401(k)s, 403(b)s and IRAs generally don’t affect the amount of aid you receive. But the same money in a non-retirement account will typically be considered funds available to pay for college.
Just as some assets can affect the amount of aid you receive, some debts can, too. A primary mortgage is sometimes taken into account by colleges when determining how much aid you’re eligible for. Other loans, such as car loans and credit card debt, aren’t usually considered and hence you won’t get more aid because of that debt.
If in doubt, play around with a college’s net price calculator. That way, you’ll better understand which assets and debts are used in its calculations. Why the variation across colleges? Much depends on whether a college disburses mostly federal financial aid, or whether it also has a large amount of its own grant money to award.
Lesson 3: Be leery of loans.
When I researched available loans, some made sense for us, while others had me running away screaming. For example, direct subsidized loans from the federal government can be a good deal, because the government pays the interest while your kid is in college, but there are limits on how much a student can borrow. At the other end of the spectrum are direct PLUS loans. These aren’t subsidized, allow the full cost of college to be borrowed and, for undergraduates, require parents to take responsibility for paying the money back.
It makes sense to weigh the amount of loans taken out against your child’s potential future earnings. In my research, I found that some colleges appear to be predatory, saddling students with a heavy debt burden, despite low odds of obtaining a job that pays enough to service the loans taken out.
Lesson 4: Take a holistic view
It’s worth looking at college expenses and benefits from a broader financial perspective. For example, using the net price calculator, you could find that a pricey private college has a lower net price for your family than the local in-state college—assuming, of course, that your child gets into the private college.
It’s also worth considering less conventional approaches, such as attending a community college for two years and then transferring to a four-year college. Alternatively, online certificate programs, such as those for computer science, may provide the necessary credentials for some careers, saving your family thousands of dollars in college costs.
Bill Anderson lives in Boulder, Colorado, and has worked as a system engineer for 30 years. He enjoys learning about personal finance and sharing his knowledge with others. Although generally pretty frugal, he can be a spendthrift when it comes to family vacations, which he believes are worth every penny.